The Federal Government last week enacted a regulation to deny people the right to contract in the United States. The right to contract has long been recognized in America, and the loss of it may have significant implications for investment and competition in the market. There are a variety of potential implications and imports. While some are reasonably apparent, others may be less obvious.
The issue of non-compete agreements is not new. They have been around for many years and have been applied in a great many industries and occupations. I wrote a piece recently about a bill in the 2024 Florida Legislative session that focused on the effect on medical practices. The federal action likely impacts any such debates of contractual rights.
To be clear, no law has been passed and signed. An administrative agency has decided that people do not have the right to contract as they deem appropriate. This will renew discussion of the New Deal, the Lochner Era, and the Supreme Court. Lochner was referenced recently in CS/CS/HB 433. According to the folks at Cornell University
Freedom of contract is the ability of parties to bargain and create the terms of their agreement as they desire without outside interference from the government. It is the opposite of government regulation.
Make no mistake, there are a great many constraints on the freedom to contract. The Fair Labor Standards Act (FLSA) is a ready example. It constrains work hours, pay arrangements, and provides protections regarding minors. It is a federal law, enacted by your elected representatives, and signed by an elected President.
On April 23, 2024, the Federal Trade Commission issued a rule. This bans the use of non-compete agreements nationwide. The announcement boldly asserts that this is intended for "protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation." There are a variety of statistics in the FTC announcement, and bold conjectures about how this broad federal ban will increase wages, spur innovation, and create new businesses.
In effect, according to the FTC, most of the world's problems are related to the freedom to contract. By eliminating it, the FTC has likely saved the world from Armageddon. That is perhaps a bit pejorative and hyperbolic. The FTC reaction is seen as response to a perceived prolferation of non-compete agreements. One instance noted in 2016 involved hourly employees of a sandwich restaurant.
According to CNBC, the New York prosecuted the restaurant's "use of noncompete agreements with franchisees in New York." Essentially, the agreements reportedly "barred departing employees from taking jobs with competitors...for two years after leaving the company and from working within two miles of" the company's restaurants.
The New York attorney general characterized the constraints as "unconscionable.” He focused upon the wage rates and the vulnerability of such workers. The potential for "limit(ing) mobility:" and "bully(ing)" were both noted. The New York example concluded with an agreement in which the restaurant would stop using or enforcing those agreements.
The New York example has received a fair amount of news coverage, before and after the FTC conclusions last week.
The implication is reasonably clear. There are contractual arrangements that evidence (1) overreach, (2) adhesion, and (3) coercion. It is possible for a variety of clauses in any contract setting to be onerous to the point of unenforceability. It is notable that few such potentials rise to the call of being prophylactically forbidden. In this example, forbidden by administrative action rather than legislation.
Is there any viable reason for precluding a minimum-wage worker from competing with your business? Is there some secret process or recipe that the worker might indiscriminately share or duplicate? The answers here are likely axiomatic.
Is there any viable reason for precluding a CEO, CFO, CIO, or CAIO from competing with your business? How about an engineer or chimist involved in your revolutionary process or discovery? Are there any employees that possess critical and highly proprietary information regarding process, recipe, or similar?
One might notice that such noncompetes have been highly common in the sale of a business. This is not an employee/employer setting, but a buyer and seller setting. If your name has been associated with a particular industry, trade, or profession in a town that might have value. If your practices have been effective or even revered, that might have value. Above and beyond the value of the "sticks and bricks" of your business, might it be worth more because your name and reputation are associated with it?
If you built Gucci, Ford, or Disney is part of the company value your name? Is it different if it is "Bob Jones Chevrolet" at sixth and main? When the owner sells that business, might they seek a price that includes recognition of that name? Would you pay more to buy Ferrari because you get to trade on the name "Ferrari?" Will you pay more if Enzo is allowed to build a factory across the street and start making other cars there that are also named "Ferrari?"
Is the FTC action limited to the employee/employer? Is it troublesome to the broader context of non-competes? Is it an overreach of Administrative action, or a legal extension of the broad impact of federal law? Will if be viewed through the lens of Lochner, or will the perspective be different? There are, perhaps, a variety of questions that will remain to be answered in the wake of this new rule.
The FTC noted in its announcement that the "banning of noncompetes will lead to new business formation" and "higher earnings for workers," "lower health care costs," and increased innovation, The only assertion missing is that banning these agreements will likely mean an end to global warming, hunger, the common cold. Their cited conclusions are so compelling that no one could possibly make an argument in favor of such agreements.
Therefore, "existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date." That is, existing contracts will be unilaterally altered by the operation of the administrative agency. The "existing noncompetes for senior executives" are allowed to "remain in force," but "employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives."
The experts in government have concluded that the loss of this contract freedom will not harm those who have utilized it. It provides brief explanation of how alternatives such as "Trade secret laws and non-disclosure agreements (NDAs)" will fully protect employer's "proprietary and other sensitive information." It notes that NDAs are so effective that "over 95% of workers with a noncompete already have an NDA." One might wonder, if they are so effective, why would anyone ever use both?
It is perhaps simple to see that there are many occupations and settings in which such contracts might be inappropriate, onerous, and unfair. That is true of many contracts and their terms. One might as well find it simple to see that there might nonetheless be various occupations and positions of trust that might well benefit from such agreements.
Regardless of how one might feel about the bathwater, there is perhaps room to consider the effect on the baby? Time will tell, but there is a reasonable chance that this regulation may see a courtroom or two before the final word.
